You're Nuts If You See Amazon's P/E as a Buy Signal

Written by: Robert Weinstein01/11/13 - 7:44 AM EST

Tickers in this article:
AAPL AMZN EBAY FB GOOG NFLX YHOO

NEW YORK ( TheStreet) -- As an investor you have choices, and you need to choose well. More than 5,000 stocks are available, and it may appear daunting at first, but you can eliminate most of them in less time than it takes waiting to hear "sell, sell, sell," during tonight's episode of Mad Money.

One stock you don't need to spend any time looking over is Amazon (AMZN) . Yes, I know it popped higher on an analyst upgrade, but if you think that's a buying signal, allow me to let you in on a not-so-hidden secret. Ready? Stocks will often peak on analyst upgrades, and bottom on analyst downgrades.

Don't believe me, no problem, take a look at the dates when any given stock made a bottom or top and then look for analyst updates. Analysts call the tops and bottoms (wrongly) way too often than by pure chance. I am not suggesting they are trying to deceive anyone, but analysts are like most people, they let emotion influence their calls too.

If you're asking the next obvious question, "can investors fade analyst announcements?" the answer is much of the time yes. This is especially the case with stocks that are already trading at a large premium to their peers.

Sure, an industry leader should trade at a premium, but when the premium becomes foolish, well, you know what they say about a fool and their money. Amazon's bulls can be forgiven for their arousal after Amazon's share price appreciation since November.

The perma-bulls shouldn't get too excited though, in Amazon and the Coming Onslaught article I wrote in September, I warned the risk wasn't worth the possible reward.

Amazon increased $13 from article publication, but in order to realize $13, shareholders had to suffer through $35 of unrealized losses and almost four months to get here. If you're the kind of investor that doesn't believe in using stop losses, then everything is great, damn the torpedoes, full speed ahead! Just don't forget about the fool and their money comment earlier.

Investing without stop losses is like going all in during a poker game. It works every time but once. It's the once that wipes out all your gains for last year, this year, and for some, the gains for the next five years.

We are going to party like it's 1999! I feel like I am back in the 90s after reading my good friend Rocco Pendola's article Amazon's P/E of 3,000: The Ultimate Buy Signal.

Pendola writes that very few people actually short Amazon and he's correct. The short interest is relatively small, however, based on the trading volume, the number of days to cover for shorts is trending higher. Also, short sellers are the smart money, they know that inflated valuations can last well beyond their ability to carry the position.